FTAI - Tourlite Capital Management Q3 2023 Investor Letter
2023-11-03 08:45:00 ET
Summary
- Tourlite Capital Management, LP is an asset management firm focused on long/short equity investing in public companies.
- Tourlite Fund, LP Founder Class returned 7.8% for Q3 2023 and 7.6% year to date, outperforming the S&P 500 and Russell 2000.
- The portfolio's sector concentration is in industrials (~45%), consumer (~35%), technology (~15%), and other (~5%).
- Special situations and short portfolio were significant contributors to the fund's Q3 performance, with event-driven investments and undisclosed shorts performing well.
To My Partners:
Tourlite Fund, LP Founder Class returned 7.8% for the Third Quarter of 2023 and 7.6% year to date. The fund has returned 13.0% since inception in April 2022, compared to (2.8%) for the S&P 500 and (11.7%) for the Russell 2000. 1,2
| Third Quarter 2023 |
| YTD 2023 |
| Since Inception (Apr ’22) |
| Tourlite Founders |
| 7.8% |
| 7.6% |
| 13.0% |
| (3.2%) |
| 13.4% |
| (2.8%) |
| Russell 2000 ( RTY ) |
| (5.1%) |
| 2.7% |
| (11.7%) |
| HFRI Equity Market Neutral |
| 1.3% |
| 2.7% |
| 4.4% |
| HFRI Equity Hedge Index |
| (1.0%) |
| 4.7% |
| (1.7%) |
Gross Contribution & Portfolio Exposures
| Gross P&L Q3 2023 |
| Gross P&L YTD |
| Dollar Exposure |
| Beta-Adjusted Exposure 3 |
| Fundamental Longs |
| (8.5%) |
| 11.8% |
| 80% |
| 88% |
| Fundamental Shorts |
| 11.7% |
| (5.7%) |
| (72%) |
| (84%) |
| Indexes / Hedges |
| 0.1% |
| (0.6%) |
| -- |
| -- |
| Fundamental Equity Spread |
| 3.3% |
| 5.4% |
| Net: 8% |
| Net: 4% |
| Event / Special Situations 4 |
| 7.7% |
| 5.2% |
| 6% 5 |
| 2% |
| Other 6 |
| (0.2%) |
| (0.1%) |
| -- |
| -- |
| Tourlite Fund |
| 10.7% |
| 10.5% |
| Gross: 158% |
| Gross: 174% |
| Net: 14% |
| Net: 6% |
| 1 Any net returns presented herein reflect the returns of the Fund assuming an investor “since inception”, with no subsequent capital contributions or withdrawals. These returns are not necessarily indicative of your net returns in the Fund, and you should follow-up with Tourlite if you have any questions about the returns presented herein 2 Bloomberg Total Return 3 Beta-adjusted exposures are calculated relative to the S&P 500 based on three-months of historical daily returns. Approximate exposure based on portfolio construction at end of quarter 4 Event driven/special situation investments, equity options. Dollar exposure represents gross and beta represents net 5 Dollar gross exposure reached 30% during the quarter while beta-adjusted net exposure remained near zero 6 Other includes currency hedges and other trading costs. Borrow cost included in short return |
Portfolio Update
At the end of the quarter, our portfolio’s sector concentration represented: industrials (~45%), consumer (~35%), technology (~15%), other (~5%). [1] ,[2] During the third quarter, the Fund’s net exposure continued to remain low. Our gross exposure was in the range of 150% - 200%, having trended lower throughout the quarter, which falls on the lower end of our expected range of 180% - 250%.
Portfolio Exposures [3] [4]
| Long Exposure |
| Short Exposure |
| Gross Exposure |
| Net Exposure |
| Dollar Exposure |
| 86% |
| (72%) |
| 158% |
| 14% |
| Beta-Adjusted Exposure 10 |
| 90% |
| (84%) |
| 174% |
| 6% |
| Top 10 Positions |
| 68% |
| (36%) |
| 104% |
Performance Commentary
For the first nine months of 2023, our long portfolio increased 11.8%. The performance trailed the S&P 500 but outperformed the more diversified Russell 2000. Our short portfolio has captured a positive spread relative to our long portfolio, while it has generated a positive return relative to the S&P 500, while it slightly underperformed the Russell 2000.
Relative Performance of Long & Short Portfolio [5]
| Gross P&L YTD |
| Relative to S&P 500 |
| Relative to Russell |
| Longs |
| 11.8% |
| (1.6%) |
| 9.1% |
| Shorts |
| (5.7%) |
| 7.7% |
| (3.0%) |
Our special situations and short portfolio were significant contributors to our third-quarter performance. Previously, we've described some of the investments in the special situation category as having exceptionally high risk-to-reward ratios. Until this quarter, these investments had mostly performed below expectations. However, in the third quarter, we made several investments in this category that significantly bolstered the overall performance of the fund.
In our year-end letter for 2022, we mentioned that our slugging percentage was lower than our batting average due to larger positions underperforming. In an ideal scenario, if your winners are sized larger than your losers, your slugging percentage would be the higher of the two. We believe that many of the losses incurred in 2022 were primarily due to a lack of near-term catalyst rather than incorrect investment theses. Consequently, we've adjusted our approach by limiting the position sizing for ideas with less certain timelines. During the quarter, we observed a positive shift in the right direction as we appropriately sized high-conviction ideas with near-term catalysts. Examples include 1) two event driven investments described in the next section. and 2) “Catalyst Driven Shorts” discussed in the “Update on Select Positions” section.
Third Quarter Gainers & Detractors
| Gainers |
| Detractors |
| Event Driven Investment |
| Technology Long |
| Undisclosed Short |
| Consumer Long |
| Event Driven Investment |
| Latch ( LTCH ) |
| FTAI Aviation |
| FIP |
| Kyndryl ( KD ) |
| Undisclosed Short |
Top Gainers
1 & 3. Event Driven Investments
During the quarter, we initiated positions in two event-driven arbitrage opportunities, both of which contributed to our performance. In both instances, we identified concrete catalysts that would lead to the price convergence of two securities with the same economic values.
One of these positions was previously an unprofitable arbitrage opportunity, as discussed in our 2022 third-quarter letter. However, we gained greater conviction in this position following a positive change in management's alignment.
2. Undisclosed Short
We have since covered a short position we initiated ahead of a potential negative catalyst that played out.
4. FTAI Aviation ( FTAI )
We continue to believe that the business is well positioned to provide more efficient and cost effective solutions through its modular factory. Additionally, the upcoming approval of PMA (Parts Manufacturer Approval) parts next year should further enhance the company's capabilities.
5. Kyndryl ( KD )
Kyndryl's most recent quarterly earnings revealed several positive indicators. Gross margins showed an expansion of over 200 basis points (bps), and EBIT margins improved by nearly 200 bps compared to the previous quarter. Post-signing gross margins were in the mid-20s, and pre-tax margins were in the high single digits (HSD). As Kyndryl continues to work through its legacy backlog, we anticipate that both gross and pre-tax margins will align with the higher margins seen in recent signings.
Top Detractors
1. Technology Long
Last quarter, we started buying shares in a business we believe to possess significant optionality at the current price level. In addition, this business has almost two-thirds of their market value in cash. While this business has yet to generate cash flow, the team has made significant progress in enhancing their advertising platform. While the Company’s financials have not reflected the progress made, partially affected by the weak advertising environment, we believe this is a business that will see growth take off as management scales active users. This is an application with strong user intent and network effect.
2. Consumer Long
After being one of our largest contributors in 2022, this consumer rollup has had a negative impact on the fund’s performance this year. Same-store sales (SSS) have experienced a significant slowdown, largely due to challenging comparisons with the previous fiscal year. However, this slowdown creates an opportunity for management to be proactive in repurchasing shares, which should reward long-term shareholders.
While we believe the business’ valuation is attractive in its current state, part of our thesis relies on management’s ability to pursue additional acquisitions at accretive multiples. This business consistently generates robust cash flow, and the balance sheet remains strong, supported by substantial real estate holdings. Furthermore, management has consistently demonstrated a commitment to enhancing shareholder value while maintaining a substantial stake in the company.
3. Latch ( LTCH )
On August 10th, Latch faced delisting from the Nasdaq due to the Company's inability to file restated financials by the August 4th deadline. While we had identified a delisting as a potential risk, we believed the Company was making progress to restate financials by the deadline. Official notice resulted in Latch's shares experiencing a substantial decline, erasing a significant portion of our previous gains.
While this delisting didn't have an impact on the underlying business, it did lead to a considerable amount of forced selling. Based on our discussions with management, we believe the company is dedicated to restating its financial statements and eventually regaining listing on a major exchange. We remain optimistic about the company's prospects once it becomes current with its financial reporting.
4. FTAI Infrastructure ( FIP )
We remain convinced that FIP represents a significant asymmetric upside opportunity and is overlooked by many investors. On the surface, the company might appear on investors' screens due to its seemingly over-leveraged balance sheet. However, upon closer examination, it becomes evident that a substantial portion of FIP's debt is non-recourse, with an average interest rate of 4%. Transtar continues to generate substantial cash flow, and even the historically underperforming asset, Jefferson Terminal, has finally turned cash flow positive. In fact, when considering the debt at the holding company level, the value of Transtar alone already surpasses the current market capitalization of FIP.
5. Undisclosed Short
We have a short position in a company with evidence suggesting that it is in violation of multiple laws and regulations. We have strong reasons to believe that both the company and its CEO may be under investigation by various authorities. The situation poses a significant risk to the stock, potentially leading to a substantial decline in the company's shares, or even rendering them worthless.
Update on Select Positions
Aggressive Short Basket
In our second quarter letter, we discussed increased short exposure to higher beta and lower quality stocks. The majority of these positions represented exposure between 75-125 basis points, although a few were sized in line with our standard short positions. As the share price of many of these companies declined during the third quarter, we have scaled back a significant portion of this exposure. We maintain a few select positions where we believe significant downside remains.
Catalyst Driven Shorts
We are short two companies that we believe are overvalued and have imminent catalysts. These businesses are trading well above their fair value, both on a standalone basis and relative to peers. These situations present attractive opportunities as both have had recent expirations of lockups on shares totaling multiples of the current float. One of the companies is in dire need of raising near-term capital. We expect both companies’ share prices to continue to decline as selling pressure persists.
Market Outlook
Over the past few quarters, we have continued to express our conservative view on the overall equity market outlook. As interest rates continue to increase across the yield curve and underlying economic and company data remains mixed, we continue to hold that belief.
Business Update
Reagan Wong joined Tourlite earlier this year as the firm’s first investment analyst. Since joining, Reagan has assisted the team by increasing the breadth and depth of our research efforts. This included contributions to the due diligence efforts for multiple special situation ideas during the past quarter.
During the quarter we onboarded an additional prime broker to enhance our trading capabilities.
The fund is open to new subscriptions. Qualified clients can reach out to ir@tourlitecapital.com .
Thank you for your trust and support. Please feel free to reach out to me with any questions.
Sincerely,
Jeffrey G. Cherkin
Footnotes1 Industry gross exposure 2 Other sectors represent healthcare and real estate 3 Approximate exposure based on portfolio construction at end of quarter 4 Beta-adjusted exposures are calculated relative to the S&P 500 based on three-months of historical daily returns 5 Performance of short portfolio is relative to the inverse of selected Index Important NotesThis letter is being furnished by Tourlite Capital Management, LP (“ Tourlite ”) on a confidential basis to recipient and does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. Such an offer or solicitation of an investment in Tourlite Fund, LP (the “ Fund ”) may be made only by delivery of the Fund’s confidential offering documents that contain a description of the material terms relating to such investment, of which this letter is not a part. The information and opinions expressed herein are provided for informational purposes only, are as of the date indicated, are summary in nature, are not complete, are subject to change and should not be relied upon by any person in making an investment decision. An investment in the Fund is speculative due to a variety of risks and considerations as are detailed in the confidential offering documents of the Fund, and this letter is qualified in their entirety by the more complete information contained therein. This letter is strictly confidential, and the information contained herein or provided herewith may not be disclosed or distributed by the recipient to any other person (other than the recipient’s affiliates, partners, members, directors, officers, employees and advisors and other agents who have a legitimate need for such information in connection with evaluating the recipient’s investment). Your receipt and review of this letter constitutes your agreement to comply with these provisions. An investment in the Fund involves a significant degree of risk, and there can be no assurance that its investment objectives will be achieved or that its investments will be profitable. This letter contains various estimates, targets and projections that are based upon various assumptions made as of the date such estimates, targets or projections were developed. Actual realized returns on unrealized investments and proceeds will depend upon various factors including, but not limited to, future operating results, the value of the assets and market conditions at the time of any disposition, any related transaction, operational and other costs and the timing and manner of sale. While estimates, targets and projections provided herein are believed to be reasonable approximations based upon available information available to Tourlite as of the date of this letter, no guarantee or assurance can be provided as to their accuracy or that such estimates, targets or projections will be achieved or met. Unless otherwise noted, the performance results of the Fund included in this letter are presented on a net-of-fees basis and reflect the deduction of, among other things, underlying management and performance fees and expenses as well as brokerage and/or custodial fees and expenses. Performance results also include the reinvestment of dividends and other earnings. Certain of the performance information presented in this letter are unaudited estimates based upon the information available to Tourlite as of the date hereof, and are subject to subsequent revision as a result of the Fund’s audit. An investor’s actual performance and actual fees may differ from the performance information shown due to, among other factors, capital contributions, withdrawals and eligibility to participate in “new issues.” The value of investments can go down as well as up. Past performance is not necessarily an indication of future performance or profitability. References to Dow Jones, S&P 500, NASDAQ, Bloomberg and other indices herein are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the Fund. The Fund does not invest in all or necessarily any significant portion of the securities, industries or strategies represented by such indices. References to indices do not suggest that the Fund will, or is likely to, achieve returns, volatility or other results similar to such indices. Certain information set forth in this letter is based upon information obtained from various third parties believed by Tourlite to be reliable. Neither Tourlite nor any of its affiliates has independently verified any such information and they shall not have any liability associated with the inaccuracy or inadequacy thereof. This letter and the accompanying discussion include forward-looking statements. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events. The information in this letter is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice or investment recommendations. Each recipient should consult its own tax, legal, accounting, financial, or other advisors about the issues discussed herein. |
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Tourlite Capital Management Q3 2023 Investor Letter